Ready or Not, Here Come E-Statements

Communicating electronically with investors in place of paper-based mailings is no longer just a pipe dream. Many fund advisors are hard at work transforming fund investors from being entirely paper dependent to embracing electronic versions of annual reports, updated prospectuses, proxy materials and even transaction confirmations and quarterly account statements.

Electronic documents save significant print and postage costs for fund companies and may even result in improved relations with investors. A study by DST Output of Kansas City, Mo., a provider of electronic communication solutions, indicates that 40% of investors who opt for e-documents are likely to stay with the same fund group.

But not every fund group has moved into the electronic format arena yet. Nor have fund investors overwhelmingly embraced this natural evolution.

According to kasina, a New York-based technology consulting firm serving the financial services industry, only 23% of all mutual fund companies currently offer investors e-documents. However, of the top 20 fund company Web sites that kasina cited in 2001, 70% offer electronic documents.

And on the receiving side, most mutual fund investors still have not embraced the e-document option. Across the industry, kasina estimates that only 2.5% of all fund shareholders have opted to receive paperless fund documents. But that number is expected to increase.

Here's how e-documents work. Printed fund documents are converted into an electronic PDF, HTML or XML file, then stored at a fund group's proprietary Web site. To begin receiving documents electronically, however, investors first have to register their fund account information,

e-mail address and a password.

When new documents or account statements become available, investors who have registered at the Web site to receive electronic documents are sent an e-mail that includes a special, hyperlinked URL. Once investors click on the hyperlink, they are zapped to the fund's special Web site page, where they must first sign in with their user name and password.

Convincing Investors

Fund companies are finding they must significantly ramp up efforts to sell investors on the benefits of receiving electronic documents over their paper-based equivalents, while acknowledging that a percentage of investors, those seen as diehard paper fans, may never accept the switch.

Liberty Funds of Boston, which has been offering electronic versions of its fund compliance documents, most notably annual reports and prospectuses, puts a message in the front of its funds' annual reports to compel investors to sign up. "See what the top of your desk really looks like. Introducing Liberty e-Delivery," the blurb reads.

Liberty has delayed its initiative to also offer e-statements and electronic confirmations until Liberty's four fund group Web sites can be consolidated into one site later this fall, said Jeanne Ferullo, vice president and director of e-commerce marketing. Right now, 10% of Liberty's investors who have registered to at least view their accounts online have also enrolled for

e-delivery of compliance documents, and the company eventually expects to have 25% of shareholders enrolled to receive

e-statements, Ferullo said.

Calvert Group of Bethesda, Md., began offering e-compliance documents 18 months ago and now has 15,000 investors who have opted in, which represents 15% of its online investors. At the beginning of 2002, Calvert began offering e-statements. It now has 2,000-plus investors signed up, which represents 1.5% of Calvert's online investors, said Karen Becker, senior vice president of shareholder services.

Becker said she needs an overall 12% sign-up rate to break even. Eventually, however, she expects 50% of investors will request electronic documents. Calvert plans to add e-confirmations in September and electronic year-end 1099 tax statements in January.

INVESCO proactively seeks investor consent with a pop-up online message. It also prints a teaser on the envelopes it uses to snail mail documents, reading, "You can receive this document online. Register your account now."

More than 37% of investors at American Century Investments of Kansas City, Mo., have opted for e-documents and that number continues to increase steadily, said Beth Randolph, a company spokeswoman.

Challenges and Benefits

Despite high expectations, some fund groups are grappling with difficult issues. They include how to format e-documents, how and when to secure consent from investors to accept only electronic versions, and what to do with abandoned e-mail addresses.

Most fund groups will stop sending an

e-mail message if a message bounces back after three attempts. Fund companies then write to investors and ask for an updated

e-mail address. But funds also look for other opportunities to update e-mails. At American Century, e-mails are routinely checked when an investor calls an account representative for any reason, Randolph said.

It's a smart move for mutual fund companies to move to electronic documents," said Derek Evans, an analyst with kasina. Cost savings can be significant, saving the firm as much as 50% over the cost to print and mail the same documents, Evans said.

In addition, e-mails that invite investors to pick up their individual fund documents obviously drive traffic directly to that fund group's proprietary Web site. Once there, investors have the opportunity to read about other funds in the group or check out other features on the site, Evans said.

Furthermore, once a fund company obtains initial consent from shareholders agreeing to accept electronic documents and secures e-mail addresses from them, fund companies can generate and send special account messages, updates or details of special product marketing campaigns to investors in an electronic format. But fund advisors must be careful not to abuse that privilege and start forwarding SPAM, or the equivalent of junk e-mail, to shareholders, Evans added.

In addition, Evans suggested that hyperlinks back to a fund group's Web site not simply connect back to the fund group's main home page. If investors have to search around and cannot quickly find the document they were invited to view, the fund group's initiative will fail, Evans said.

Obtaining consent can be trying, according to fund company executives. "Getting consent is the number one challenge," echoed Evans, who notes that there are three groups of investors fund advisors confront.

The first group usually receives a statement in the mail, looks at it and then shreds it. A second group receives a statement and then files it away.

But a third group, the group fund companies are finding much more receptive to e-documents, are early adopters of the Internet and are comfortable with e-mail, Evans said. These are the easiest investors to convince to use electronic documents, while it is a far tougher sell to the two other groups, Evans said.

"Initially, companies thought that there would be a higher adoption rate. But now they've realized not everyone will consent to e-statements," Evans said.

"There was a notion of, Build it and they will come,'" said Edward J. Mills, director of marketing at DST. "But that didn't happen."

Fund companies must remember to reach out for consent in many forms, and keep the client dialog going, Mills said. Even if investors don't opt in the first time they are asked, funds should continue to request consent and give investors the opportunity to consent through a customer service representative, via an automated telephone voice response system, or through a postcard mailed to them, as well as through the Web site of the fund group, he said.

To obtain consent, fund companies can even offer incentives to investors who register for e-documents. One client offers a coupon for $15 off a future order of flowers, Mills said.